Oil is one of the most important and most frequently used resources in the world. The price of oil has repercussions for everyone from the cost of filling up our autos to purchasing groceries, plane tickets and even medicine among many others. It’s a fact that many people aren’t aware of how the movements in oil prices can impact their wallets.
And while oil has an indirect effect in our lives, it’s also a commodity that can be used to make money. While it doesn’t have a large share of daily trade volume like the massive Forex market, it certainly serves a good outlet for savvy investors who are looking to expand their portfolio.
What Impacts Oil Prices?
The price of oil usually depends on the supply and demand. Simply put, if the demand for oil is higher than the supply, then the price will rise. In the same way, if the supply of oil is higher, then the price goes down. If you have a basic idea of economics, then you probably already understand this concept.
Another factor that affects oil prices is the current supply in terms of output, as outlined by the Organization of Petroleum Exporting Countries (OPEC). The OPEC is an organization made up of 12 oil-producing countries that produce 46% of the world’s oil. Its aim is to basically protect the interest of oil producing companies and has the ability to influence the market.
The oil demand specifically in the US, the world’s largest consumer of oil, is another major factor that affects oil prices. The weekly petroleum status report is given out every Wednesday at 10:30 AM, New York time. This reports how much oil is currently stored in the strategic reserves in the US.
Apart from supply and demand, investor speculation has a large effect on the oil prices as well. These investors bid on oil derivatives. Not only investors but also financial institutions such as banks also participate in oil trading as they hold commodity linked investments in their asset allocation strategies. There are traders who trade oil for short periods to make quick profits while there are also those who do long term (multi-year) speculative trades.
There are several brokerage companies around the world that offer oil/gas products for investing. The most popular type being offered is the oil futures. Oil futures are basically agreements to buy or sell oil at an agreed price on a future date. Futures involve speculating on the market prices and basing one’s decision on the supply and demand of oil.